Investment Firm Comments on Proposed Regulations on Net Investment Income Tax and Planned Gifts

Investment Firm Comments on Proposed Regulations on Net Investment Income Tax and Planned Gifts

News story posted in Regulations on 16 April 2013| comments
audience: National Publication | last updated: 16 April 2013


The planned gift investment and administration firm of Kaspick & Co. has responded to a Treasury and IRS request for comments in connection with proposed regulations under Section 1411 and their application to charitable remainder trusts, charitable gift annuities, and pooled income funds.


Office of Management and Budget
Attn: Desk Officer for the Department of the Treasury
Office of Information and Regulatory Affairs
Washington, DC 20503

Internal Revenue Service
Attn: IRS Reports Clearance Officer
Washington, DC 20224

RE: Comments Pursuant to Paperwork Reduction Act Regarding the application of Section 1411 to Charitable Remainder Trusts, Charitable Gift Annuities, and Pooled Income Funds (REG-130507-11).

The Regulations should:

1. Direct that net investment income in a Charitable Remainder Trust shall be tracked and distributed following the existing four-tier accounting structure of section 664;

2. Clarify that the net investment income tax on appropriate items of income from Charitable Gift Annuities will be spread out over an annuitant's life expectancy;

3. Clarify that the income recognized and distributed from Charitable Gift Annuities established prior to 2013 is not subject to the new tax under Section 1411;

4. Clarify that undistributed short-term capital gains in Pooled Income Funds are not subject to the net investment income tax under Section 1411.

Dear Sir or Madam,

KASPICK & COMPANY is a leading provider of planned gift investment management and administrative services and counts many of the nation's top educational and social service organizations among its clients. As such, KASPICK & COMPANY is intimately familiar with the four-tier accounting, tax reporting, and investment management applications of existing laws and actively monitors proposed laws and regulations in the field. It is with this professional knowledge background that we submit the following.

The method contained in the proposed Regulation seeks to avoid sub-accounting within each tier of income created under Section 1.664-1(d)(1) and instead effectively creates a fifth tier of NII that must be tracked and reported separately by trustees. We believe that creating this fifth tier alongside the already well understood and applied categories of Section 1.664-1(d)(1) will result in greater confusion for trustees and income beneficiaries of Section 664 trusts. The confusion among income beneficiaries will itself pose a challenge to trustees. To illustrate, a beneficiary receives his annual income payment comprised of pre-2013 ordinary income for regular tax purposes (tier-one income). Yet, he is subject to the NII surtax on the payment as a result of the trust's undistributed post-2012 capital gain (tier-two income). Not only is this counter-intuitive for income beneficiaries, but the trustee must go to great lengths to describe the reason for the surtax on a type of income that was not even distributed under the traditional four-tier system. There are few areas of the tax law associated with charitable split interest gifts that are as well understood and applied as the four-tier accounting structure. No matter the method, an additional requirement to track and distribute NII will increase the recordkeeping and compliance burden of trustees and administrators. The proposed method does little to mitigate this additional burden but instead requires trustees to learn and apply an entirely new and non-complementary accounting system. However, allowing trustees to track and distribute NII on the class-by-class basis complements the existing four-tier structure and will impose less of a burden and learning curve for trustees. Trustees must already track each item of income and assign it to the appropriate tier. Further tracking the amount and timing of NII in each tier is far more intuitive and accurate than the proposed method. We respectfully request that Treasury apply the tracking and disbursement requirements of Section 1411 to the already well understood and used Sec. 1.664-1(d)(1) requirements on a class-by-class basis.

1. We urge Treasury to reconsider the method used to determine the distributable amounts of net investment income (NII) from Section 664 charitable remainder trusts under Section 1411 of the Internal Revenue Code. While we recognize and thank Treasury and the Internal Revenue Service for giving consideration to the recordkeeping and compliance burden imposed upon trustees of charitable remainder trusts, we believe that the method proposed is inconsistent with the existing four-tier structure, is less intuitive, and is less beneficial in terms of the time and effort required of trustees of such instruments.

2. We encourage Treasury to issue final regulations that offer some guidance on the NII rules applicable to charitable gift annuities established post 2012. The Regulations should clarify that the items of income subject to the surtax on net investment income may be spread out over the life expectancy of the annuitant, similar to other items of income, pursuant to Treasury Regulation Section 1.1011-2(c), Example 8.

3. Furthermore, The Regulation should clarify that the benefit afforded to charitable remainder trusts with regard to pre-2013 gifts also applies to pre-2013 funded charitable gift annuities. The gains associated with charitable gift annuities funded prior to 2013 were realized prior to the application of the new NII tax, yet recognized ratably over the annuitant's life expectancy. The 3.8% surtax on NII is a new tax, applicable to post-2012 NII. The tax is not an increase in an existing tax rate such as the tax on long-term capital gains. We believe that gains realized upon a pre-2013 transfer to a charitable organization in exchange for a charitable gift annuity escape inclusion in the tax under existing tax law and clause 3 of Article I, Section 9 of the United States Constitution because the gains were realized prior to the application of the new 3.8% Medicare surtax on NII.

4. We believe that pooled income funds under Section 642(c)(5) should be excluded from the surtax under Section 1411. Pooled income funds are similar in operation to charitable remainder unitrusts. However, unlike charitable remainder trusts, pooled income funds do not escape all instances of federal income taxation. While pooled income funds are not taxable on long-term capital gains, the funds are subject to tax on short-term capital gains which are not distributed to income beneficiaries pursuant to the terms of the trust instrument or local law. Because these gains are added to the principal of the fund for ultimate distribution to the charitable remainderman, applying the new surtax thereupon is in effect another tax on the charitable organization itself. It is well settled that charitable organizations are exempt from federal income taxation because they lessen the burden of government. By subjecting pooled income funds to the NII tax, Treasury will be reducing the amount of funds available for such organizations to continue lessening the already strained burdens of government. Furthermore, treating pooled income funds in a manner significantly different from charitable remainder trusts is inequitable.

We respectfully submit the foregoing comments for Treasury's consideration prior to issuing final regulations on Section 1411.

Lindy Sherwood
President and Managing Director
Kaspick & Company
Redwood City, CA

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